TEXT-Fitch release on Russian power sector

(The following statement was released by the ratings agency)

April 30 - Fitch Ratings says it expects the Russian power sector's liberalisation process to remain on schedule, but warns of the potential for increased leverage from debt-funded capital expenditure.

"Successful completion of Russia's power sector liberalisation programme is central to Fitch's Positive Outlook for the sector," said Anton Krawchenko, Associate Director, in Fitch's Energy, Utilities and Regulation team. "Liberalisation is expected to have a positive impact on the cash flows of Russian generators due to higher prices and reduced exposure to the volatility of inflation and rising energy input prices."

In two special reports published today, Fitch says forecasts for continued strong domestic economic growth (forecast GDP growth of 7% in FY08) should help to keep Russia's power sector on course for liberalisation, since a failure to considerably expand generation capacity would undermine economic growth prospects. Competing social priorities mean that private capital is the only realistic option to fund this capacity expansion. Liberalisation, in turn, is a pre-requisite for the continued attraction of both domestic and foreign private capital to the power sector in Russia.

Nevertheless, Fitch cautions that while privatisation revenues and subsequent equity injections are expected to fund the sector's programme of capacity expansion and refurbishment, the potential remains for sharply higher leverage among some generators. There is already evidence of capex plans at some companies edging past the level originally envisaged by incumbent RAO UES (which is unbundling its generation assets) when it established the auction-based privatisation process.

In the report, Fitch also discusses the potential for a reconsolidation of the competitive power sector, which may act to constrain the ratings of Russia's smaller wholesale power market participants. Notably, the proposed merger of the power assets of SUEK and Gazprom (GAZP.MM) would consolidate almost 20% of Russia's existing power capacity under two companies that dominate domestic coal and gas supply.

The full reports, titled "The Russian Power Generation Landscape 2008" and "Russian Power Industry Overview", can be found on the agency's public website at 'www.fitchratings.com'.